Sixty Second Summary
Understanding ESG: E for Externality
30 Nov 2018 - Estimated reading time: 1 minute
In this edition of sixty second summary we explain why there may be a shift in the responsibility for managing the external impacts of our economic activity. In this edition we take a look at:
ESG: E is for Externalities
It has long been known that, whilst generating wealth for investors, economic activity also creates externalities or impacts. These externalities have associated costs that are not wholly borne by the entity that creates them. Policy change is increasingly likely to require companies to reflect the cost of these externalities in their business models. This creates both a risk to future returns for investors, but also offers the potential for innovation and opportunities. In the midst of this change, is it acceptable for investors to simply do nothing?
We are beginning to see a change in view as to who should be taking responsibility for the social and environmental costs created by economic activity. Individuals, investors and policy makers are increasingly questioning how much longer the taxpayer can (and should) continue to fund any negative externalities caused by the corporate sector.
Increasing attention placed on environmental externalities
These environmental externalities or costs fall within the “E” of ESG (Environmental, Social and Corporate Governance) and the most visible of these externalities is climate risk. Earlier this year, ClientEarth wrote to the trustees of 14 pension schemes highlighting the risk of litigation for failing to protect their investments against climate risk. In effect, pension schemes have been placed “on notice” for not building climate risk considerations into the investment decision making.
Responsible investment is about understanding risks and opportunity
Policy makers are becoming increasingly aware of, and are beginning to take action to deal with, a broader range of environmental risks. This has meant that long-term asset owners are being increasingly placed in the spotlight as institutions that have a role to play.
Climate change: the time to act cool
Friends of Earth released their report titled ‘Risky Business: Local government pension funds and the climate crisis’ which provided thoughts on how investors are ‘failing to protect themselves from the financial risks of climate change. With the IPCC report stating that we have just 12 years to significantly decarbonise and avoid global temperatures rising above 1.5ºC, can the public sector continue to bear the costs of the physical risks of climate change?